IMF Throws Weight Behind Euro Zone Bond Idea

This compares with a market of some 1 trillion euros for German bunds.

Momentum grew on Saturday behind a proposed common European bond to help bolster fragile member states during the global economic crisis as the International Monetary Fund threw its weight behind the idea.

Germany and France urged a radical overhaul of global financial rules ahead of a major summit on Sunday which aims to forge a common response to the crisis, but bloc heavyweights such as Germany are expected to try and stymie a euro bond plan.

"We have a big player which is the European Union and there is no reason why it shouldn't have its own way of financing and to issue bonds is a good idea," IMF Managing-Director Dominique Strauss-Kahn told a news conference in Rome.

"I really support this initiative," he said. "It really depends on the European Commission and the EU authorities but I see no reason why the EU cannot do this."

Strauss-Kahn said he saw "a lot of downside risk" to the IMF's forecast for a 2 percent fall in gross domestic product in 2009 for the euro zone, with near-term crisis risks linked to emerging markets' ability to finance their current accounts.

"Great vigilance" was needed in the coming weeks, he added.

Speculation grew this week Germany and other major European states would come to the rescue -- for the first time in the 10-year euro zone history -- of bloc members such as Ireland and Greece whose finances have been battered during the crisis.

A common euro zone bond could alleviate pressure on financially weak euro states that are being forced to pay hefty premiums over stronger bloc members to finance their debt.

But euro zone sources have said Germany strongly opposes the idea of a bond backed by the whole 16 member euro zone area on the grounds it would benefit countries with weaker credit ratings, but offer little to states with solid ratings.

European Central Bank Executive Board member Lorenzo Bini Smaghi said exactly how a common bond would work remained unclear, and numerous details still needed to be ironed out.

"No one has defined what this bond would be like, how it should be done, who pays, who guarantees," he said. "Would it be issued by the Commission or jointly by member states? Until there's a clear idea, it's hard to express a judgment."

Asked if he thought there was growing political support among European governments for such a bond, Italian Economy Minister Giulio Tremonti said: "Honestly, yes."

"We are lacking a common European vision and the idea that Europe issues European bonds to finance Europe itself - it would be crazy and suicidal not to do it," Tremonti told Italy's state television RAI.

Jean-Claude Juncker, chairman of euro zone finance ministers, has proposed a common bond should cover the first 40 percent of the overall euro zone government debt, according to sources close to the Eurogroup.

If agreed on, common euro zone bonds would in a matter of a few years create a highly liquid market of some 4 trillion euros ($5 trillion) which could successfully compete with a similar size U.S. treasuries market for large investors like China.

This compares with a market of some 1 trillion euros for German bunds.

FRAGILITY

Germany is keen for Sunday's Berlin summit to focus on long-term financial reforms and not be hijacked by new problems, such as worries about the fragility of some euro zone and eastern European nations.

The summit aims to forge a European consensus ahead of a G20 meeting in London on April 2.

World leaders are under pressure to show they can deliver on pledges made at a November G20 summit in Washington, where they unveiled a detailed plan for combating the financial crisis and guarding against future meltdowns.

"We want to ensure that in the future there are no gaps in the world when it comes to supervising financial market products, market players and instruments," German Chancellor Angela Merkel said in her weekly podcast.

French President Nicolas Sarkozy, accused by some EU partners of distorting competition by giving aid to domestic carmakers, said Europe should unite behind bold measures to combat the financial crisis.

"We need a common position for the summit in London," he told reporters at a farm fair in Paris.

"I will not associate myself to a position that does not give an ambitious response to this deep crisis."

U.S. President Barack Obama, fulfilling a campaign pledge he hopes will jolt the economy out of recession, ordered the U.S. Treasury on Saturday to implement tax cuts for 95 percent of Americans in a bid to boost consumer spending.

While Germany and France urged an ambitious global regulatory overhaul, Italy's Tremonti said for the crisis to end, it was crucial to replace current accounting rules.

He said many of them were "suicidal...and could have been written by (Osama) bin Laden."